How Bitcoin Mining Can Accelerate the Development of Solar Power - Mitchell Dong
Bitcoin mining can accelerate the development of solar power. Current impediments to solar, such as the difficulty in obtaining Power Purchase Agreements or PPAs, can be addressed through bitcoin mining acting as the source of revenues to cover capital costs. A bitcoin mining facility and solar power plant can be co-located in remote areas, reducing the need for lengthy transmission lines. As certain solar power plants could be completely “inside the fence” there may be fewer requirements when dealing with the local utility.
Developing and financing a utility scale solar project is very challenging. Since solar is so capital intensive, many solar facilities typically take on 60- 80% debt and amortize debt over 15- 20 years. To support this debt, banks require PPAs with matching terms, at a minimum price, take or pay provisions and other financeable terms. Negotiating such PPAs can be a nightmare to developers and are very costly and time consuming.
Solar resources are often located in remote areas, such as deserts, for example Mohave, Gobi, Sahara, Arabian, Atacama, Australian and Antarctic. No resource center is located near load centers or major cities. Due to the distance, new transmission lines are required to bring these resources to areas where the power can be used. This requires acquiring new right of ways and extensive environmental approvals which is also costly and time consuming.
Bitcoin mining can solve some of these problems. First, mining at current bitcoin prices, hash rates, the difficulties involved, lower equipment prices, and is very profitable. Paybacks of one year are not unheard of in the industry. Bitcoin mining can be the source of revenues, instead of a PPA, to repay debt and give a return to investors.
A bitcoin mining facility can be located anywhere including in remote areas as bitcoin output can be transferred over the internet. There is no need for lengthy transmission lines to sell power as the solar power can be consumed on site. However, if bitcoin mining facility needs power from the grid, then grid connections would be necessary.
There are challenges for both solar and bitcoin mining facilities. From the perspective of an investor in bitcoin mining, solar greatly increases the CapEx and therefore, there is a much lower return on investment. Mining investors are used to very short paybacks of one year as mining equipment life is often under 2–3 years before obsolesce. However, solar investors are accustomed to 10–20 year paybacks or relative low rates of return, e.g. 5 to 8%, but they are not willing to take commodity price risk or technology risks like falling bitcoin prices or decreasing hash rates or increasing difficulty rates.
Another big challenge is the difference between capacity factor or utilization rate between solar and bitcoin mining. Bitcoin mining facilities usually run 24/7, 365 or at a 99% capacity or operating factor. Solar runs at a 15- 20% capacity factor, e.g. solar facilities run the equivalent of 15- 20% of the time at full name plate rating. To provide bitcoin mining with 100% solar, a 1 mw mine would need 5- 8 times the size of solar facility plus comparable battery storage. This CapEx is way beyond what a miner could typically afford and is uneconomic in today’s terms. But it’s an aspiration.
So, how do we bridge the gap? There are several solutions.
First, we need to find hybrid investors who are comfortable with both bitcoin mining and solar investments and are willing, for ESG reasons, to accept a lower return on investment in mining because of a much higher percentage of solar power in the energy input of the bitcoin mine. For example, the payback period might be lengthened from 1 year to 2–3 years, but the solar component can be boosted from 25% renewable off certain grids to over 50% renewable with a dedicated solar power plant.
Second, the risk of bitcoin prices falling from $40K to below a current breakeven point of $10K can be hedged for 6 to 12 months with futures and options. This is costly but there is sufficient liquidity in the crypto derivative markets to place these hedges.
Third, there are emerging derivatives for hedging hash rates on the OTC markets. These hash rate derivatives are costly and the liquidity is thin and while theoretically possible, it might not be practical yet..
Finally, there are guarantees from equipment manufacturers and hosting facilities that can give technology assurances that the mining equipment and data center will perform as expected. This is typical in the solar field and can be extended to the mining portion of the facility.
If the above can be accomplished, then banks may lend debt to such a hybrid facility and would reduce the payback period. Similarly, insurance companies may come to the market for hybrid facilities as they do regularly for the more mature solar industry.
The solar Investment Tax Credit would also reduce the payback period, as would the sale of RECs from the solar facility. The Accelerated Cost Recovery System (“ACRS”) for depreciation from the solar investment would shelter a portion of the taxable income from the mining operations.
Many of these ideas would also apply to other renewable technologies such as wind, hydro, geothermal or waste to energy for example.
Overall, I hope and believe that solar power development can be accelerated with bitcoin mining if financiers and developers are creative and persistent in structuring hybrid financings.
About the author: Mitchell Dong is a solar power developer and cryptocurrency miner and trader. He has been developing solar, hydro, cogeneration power facilities for 40 years in the US, Africa and China. He has also been a trader of physical uranium and electric power for the US and Scandinavia. He runs a hedge fund that trades cryptocurrency on behalf of bitcoin miners in Asia and USA and is actively sourcing low cost power for bitcoin miners globally.
